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Nonprofit Research @ Pitt: Strategic Management Theories

This guide supports those doing research related to nonprofits and strategic management in the public sector.

Resource-Based Theory

The firm is a bundle of resources and capabilities. These resources and capabilities are made up of physical, financial, human and intangible assets. The theory is conditioned on the fact that resources are not homogenous and are limited in mobility. The firm can translate these resources and capabilities into a strategic advantage if they are valuable, rare, inimitable and the firm is organized to exploit these resources.  

Key Readings

Penrose, E. 1959. The Theory of the Growth of the Firm (Third ed.). Oxford, UK: Oxford University Press.

Williamson, O. E. 1975. The economics of governance: Framework and Implications. Journal of Theoretical Economics, 140: 195-223.

Porter, M. E. 1980. Competitive Strategy. New York: Free Press.

Porter, M. E. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press.

Barney, J. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1): 99-120.

Rumelt, R. P. 1991. How Much Does Industry Matter. Strategic Management Journal, 12: 167-185.

 

Network View

The firm is a node within a connection of players including rivals, suppliers, customers, institutions and other entities. These nodes are linked by individuals within their firms. These connections provide legitimacy and resources to the firm and the greater number and diversity of connections suggest the strength of the firm. When a firm has greater levels of connectivity, it suggests that the firm has a higher degree of network centrality. These connections can also provide constraints on the firm and limit its freedom of action. 

Key Readings

Granovetter, M.  1983.  The Strength of Weak Ties.  Sociological Theory, 1: 201-233.

Granovetter, M.  1985.  Economic Action and Social Structure: The Problem of Embeddedness.  American Journal of Sociology, 91 (3): 481

Burt, R. S.  1992.  Structural Holes: The Structure of Competition.  Harvard University Press, Cambridge, MA.

 

Transaction Cost Economics

Transaction Cost Economics (TCE) simultaneously explains the purpose of the firm and limits, or boundaries, on the firm. The theory finds that the market may not always be the most efficient in organizing the economy but that in some cases the firm is internally better at some transactions. Because the actors/agents that populate both sides of the transaction are boundedly rational they contract but in imperfect ways. Moral hazard can arise when agents act in opportunistic ways.

Key Readings

Williamson, O. E. 1975. The economics of governance: Framework and implications. Journal of Theoretical Economics 140: 195-223.

Monteverde, K. and D. Teece 1982. Supplier Switching and Vertical Integration in the Automobile Industry. The Bell Journal of Economics 13(1): 206-213.

Pisano, G. P. 1990. The R&D Boundaries of the Firm: An Empirical Analysis. Administrative Science Quarterly 35: 153-176.

Granovetter, M. 1995. Coase Revisited: Business Groups in the Modern Economy. Industrial and Corporate Change 4(1): 93-130.

Resource Dependence Theory

This theory suggests that no firm can secure the resources and capabilities required to survive without interacting with firms and individuals beyond their boundaries.  Firms will actively seek to control (either internally or externally) critical resources as best they can within an environment filled with uncertainty and improve their chances of survival through adaptation to the environment.  This theory suggests that firms are engaged in co-optition (a mix of cooperation and competition).

 Key Readings

Pfeffer, J. and Salancik, G.  1978. The External Control of Organizations: A Resource Dependence Perspective. Harper & Row Publishers, New York.

Ahuja, G.  2000.  Collaboration Networks, Structural Holes and Innovation: A Longitudinal Study.  Administrative Science Quarterly, 45: 425-455. 

Strategic Management Process Framework

This concept promotes a systematic approach to strategy formulation that is rooted in the mission, or purpose, of the organization and tests the implementation choices and actions of the firm against that mission.  The mission forms the direct basis for the specific targets the firm will select and attempt to achieve.  It also defines the nature, form and extent of evaluation of the firm and its environment; as well as the nature of the corporate and business level decisions it makes.  Finally the mission defines the conditions by which the firm will determine the success of its actions.

 

Key Readings

Barney, J. B. and Hesterly, W. S.  2010.  Strategic Management and Competitive Advantage: Concepts and Cases.  3rd Edition.  Prentice Hall, Upper Saddle River, New Jersey.

 

PESTLE

As firms attempt to ensure complete coverage to their environmental scanning techniques, a series of acronyms have been created to provide for a more systematic and thorough report on the environment.  Here the acronym represents the Political, Economic, Social, Technological, Legal and Environmental trends that are or could impact the firm, now or in the future.  Similar approaches are arguably more focused (PEST) or more thorough (STEEPLE or STEEPLED – wherein Ethical and Demographic trends are included) but all represent analyses in which the firm attempts to reconcile its activities with real or perceived environmental trends.

 

Key Reading:

Fahey, L. and King, W. R.  1977.  Environmental Scanning for Corporate Planning.  Business Horizons, August: 61-71. 

Real Options

Since it cannot predicted which technologies will ultimately become important in the future, the decision of whether or not to invest in R&D that is related to these technologies is based on partial information and characterized by uncertainty. Real options theory can be used to help guide companies when they are making investment decisions under uncertainty. In this approach, researchers view investing in a technology with a highly uncertain future as taking an option that may or may not be exercised, depending on how new information changes the option value of that opportunity. The objective of each funding milestone is to learn more, thereby reducing the uncertainty about the value of an opportunity. The idea is that firms do not prematurely close down investment in a radical but unproven technology, but neither do they commit to the investment until it is fully developed.

Key Readings:

Dixit, A., & Pindyck, R. 1994. Investments under uncertainty. Princeton, NJ: Princeton University Press.

McGrath, R. G., & MacMillan, I. C. 2000. Assessing technology projects using real options reasoning. Research Technology Management, 43(4): 35-49.

 

Sustainability

Sustainable development involves the integration of environmental thinking into every aspect of social, political, and economic activity. Sustainability requires we pay attention to entire life cycles of our products. Today, with our growing knowledge of the living earth, product development can reflect a new spirit which allows nature and commerce to fruitfully co-exist.


Key Readings:


Elkington. 1994. Towards the sustainable corporation: Win-win-win business strategies for sustainable development. California Management Review.

McDonough, W., & Braungart, M. 2002. From Cradle to cradle: remaking the way we make things: North Point Press.

Knowledge-Based View

The firm is a bundle of knowledge in this application which extends the Resource-Based View. Knowledge is a specific and special resource at the heart of the firm. Knowledge is both highly heterogeneous, difficult to imitate and difficult to understand by those outside the firm. In this theory, knowledge forms the basis for competitive advantage. It should be noted that there are some researchers who question whether this is truly a theory of the firm. As such it is noted as a view.

Key Readings

Foss, N. J.  1996.  More Critical Comments on Knowledge-Based Theories of the Firm.  Organization Science, 7(5): 519-523.

Grant, R. M.  1996.  Towards a Knowledge-Based Theory of the Firm.  Strategic Management Journal, 17: 109-122.

Phelan, S.E. and Lewin, P. 2000. Arriving at a Strategic Theory of the Firm.  International Journal of Management Review, 2 (4): 305-323.

 

Agency Theory

Agency theory is about goal incongruence between owners/principals/managers/shareholders and those they employ (agents). It describes the firm as a nexus of contracts. Both sides in the contract operate with self-interest and guile.  Contracts between parties operate best when they are efficient in sharing of risks and information and they recognize the variability of party’s goals. Agency theory suggests that boards of directors act as monitors hired by shareholders over executives.

Key Readings

Berle, A. A. & Means, G. C. 1932. The Modern Corporation and Private Property. New York, NY: Macmillan.

Eisenhardt, K. M. 1989. Agency Theory:  An Assessment and Review. The Academy of Management Review, 14(1): 57-74.

Fama, E. & Jensen, M. 1983. Separation of Ownership and Control. Journal of Law and Economics, 26(June): 301-325.

Smith, A. 1976. An Inquiry into the Nature and Causes of The Wealth of Nations. Chicago: University of Chicago Press.

Zajac, E. J. & Westphal, J. D. 2002. Intraorganizational Economics. In J. A. C. Baum (Ed.), Companion to Organizations: 233-256. Oxford, UK: Blackwell Publishing.

 

Institutional Theory

This theory considers the impact of the firms’ environment and the cognitive, normative and regulative structures that surround the firms.  It attempts to explain how these structures impact the actions and boundaries of the firm.    These structures provide stability to actions, routines and cultures; define legitimacy and constrain action.  The theory focuses on how institutions are created, how they pervade societies and industries and finally how institutions change over time.  While well-accepted, it has provided stronger theoretical rather than empirical contributions to strategic management.

 Key Readings

Stinchcombe,M. 1965.  Social Structure and Organizations. Handbook of Organizations. J.G. March.  Chicago, Rand McNally, 142-169.

Meyer, J. and Rowan, B.  1977. Institutionalized Organizations: Formal Structure as Myth and Ceremony. American Journal of Sociology, 83: 333-363.

DiMaggio, P. J. and Powell, W. W.  1983.  The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields.  American Sociological Review, 48: 147-160.

 

Game Theory

Game theory is a special branch of mathematics which has been developed to study decision making in complex circumstances. It is a major method used in mathematical economics and business for modeling competing behaviors of interacting agents. People rarely make decisions in a vacuum. The right choice for us may depend upon the choices made by others. In turn, the profits and happiness of these other individuals depends on the actions that we will take.  Real-world interactions are modeled as simplified abstractions.  An example of game theory is the prisoner’s dilemma. The dilemma resides in the fact that each prisoner has a choice between only two options, but cannot make a good decision without knowing what the other one will do. Examples of "games" that businesses play that could be analyzed with game theory are patent races or the winner's curse.

Key Readings


von Neumann, J.  and Morgenstern, O.  1944.  Theory of Games and Economic Behavior, Princeton University Press.


Nash, J.  1950. "Equilibrium points in n-person games", Proceedings of the National Academy of Sciences of the United States of America 36 (1): 48–49

TOWS

The analysis of a firm’s strengths and weaknesses, opportunities and threats to often is an open-ended and non-rigorous process in which unchallenged strengths are matched with non-existent opportunities. The TOWS framework is an example of the new trend in “nested” analyses.  Using analytical techniques such as competitor analysis, PESTLE, the Delphi method (gathering information from smart or well-trained, or hopefully both,  groups of people) to create a forecast of sorts of the opportunities and threats facing the firm.  The value net, value chain, VRIO or similar tools are then used to develop a list of firm strengths and weaknesses.  The four lists are then matched (TS, TW, OS, OW) to determine if the company needs to shore up key weakness or has the right strength to take advantage of market opportunities.

 

Key reading:

Prescott, J.E. and Herko, R.  2010. “TOWS Analysis: The Role of Competitive Intelligence”, Competitive Intelligence Magazine, 13 (3): 9-12.

Value Net

The Value Net is a schematic map designed to represent all the players and the interdependencies among them. The Value Net model from Adam Brandenburger and Barry Nalebuff recognizes there are four main groups that influence the course of any firm: customers, suppliers, competitors (existing rivals, new entrants, substitutes), and complements. The value net is based on Porter’s Five Forces model, but emphasizes on the notion that competition and co-operation can co-exist (co-opetition).  Co-opetition means cooperating to create a bigger business "pie," while competing to divide it up.  For instance, the arrangement between  Peugeot, Citroën and Toyota to share components for a new city car - simultaneously sold as the Peugeot 107, the Toyota Aygo, and the Citroën C1 - qualifies as co-opetition. In this case, companies save money on shared costs while remaining fiercely competitive in other areas.

Key Readings

Brandenburger, A. M., & Nalebuff, B. J. 1996. Co-opetition. New York, NY: Currency Doubleday

Wicked Problems

The bulk of analyses a manager will conduct are in the range of “ordinary” management questions.  That is, a manager will be able to draw on the experiences of consultants or senior managers to craft neat “business school solutions” to resolve the issue.  Some issues, due to their complexity; their solvability or their inter-relatedness with other difficult issues, define easy categorization or explanation.   This literature adopts the stance that the easy problems have been solved and that elegant solutions to wicked problems are available.

Key reading:

Camillus, J. C.  2008. Strategy as a Wicked Problem.  Harvard Business Review, May: 99-106.

 

Red Queen

 

Sustainable development involves the integration of environmental thinking into every aspect of social, political, and economic activity. Sustainability requires we pay attention to entire life cycles of our products. Today, with our growing knowledge of the living earth, product development can reflect a new spirit which allows nature and commerce to fruitfully co-exist.

 

Key Readings:

 

Elkington. 1994. Towards the sustainable corporation: Win-win-win business strategies for sustainable development. California Management Review.

 

McDonough, W., & Braungart, M. 2002. From Cradle to cradle: remaking the way we make things: North Point Press.

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Who wrote these summaries?

Bertels, H. and Herko, R.  (2011)  Katz Graduate School of Business, University of Pittsburgh (c)